Last week, I encountered a few cases of young clients who had made serious mistakes financially even though they had just started their career. For young persons, they must understand what lies ahead of them. This article is my attempt to advice young persons and fresh graduates on what they should and should not do.
These are the things young persons should know:
- No jobs are secure. So they must never have the idea that their company will keep them forever. Almost everyone these days face retrenchment risk.
- They will be facing two large big ticket items. If they have a BF/GF, they will be having an expensive honeymoon in a couple of years time (hey, this is one in a life time – better have a good honeymoon man!). Whether single or attached, they will eventually buy a property to stay. With the property price sky rocketing despite the economic recession and the Cash-Over-Valuation (COV) increasing like nobody business plus renovation cost, they will need HUGE amount of cash on hand.
In view of the above, the following is what the young person should do:
- Save up a war chest of at least 6 months to two years (depending on the stability of the job) of cash.
- Get the basic insurance because you don’t have money to pay your medical bills for yourself if you are sick.
The following are things that a young people should NOT do (which unfortunately almost all my clients did it all):
- Do NOT invest a single cent in stocks and unit trusts. Your priority is to build up cash. Unit trusts and stocks are meant for long-term. You should not have the mentality of cashing out these investments for short-term.
- Similarly do NOT buy regular premium ILP which has high investments component.
- Do NOT buy regular premium endowment or anticipated endowment (those that you get X% every Y years). These so called saving plans offer poor value for money but most importantly do NOT provide you with the liquidity for emergency cash purpose and your need to have large amount of cash for your honeymoon and property purchase.
Young persons should also be wary of many financial salespersons who will cheat you. Because these salespersons know your weakness – which is ignorance in financial planning – they will try to sell what you want rather than what you need. Young people tend to “want” the following:
- They want to grow their wealth quickly or
- They want to grow their wealth in a disciplined fashion.
In view of this, financial salesperson will either sell you an ILP (so that you can grow your wealth “quickly”) or sell you an endowment (so that you can grow your wealth in a “disciplined fashion”).
However, they will not tell you what you really “need” for fear you will not buy any products from them. The things young people NEED are:
- To save up cash for short-term usage like emergency cash, honeymoon and property purchase.
- Basic medical insurance (note: insurance and investment are NOT the same).
For the first need on saving up enough cash, it does not involve products because you just need to save into cash or fixed deposits. For basic medical insurance, the commission is only enough to buy a cup of Starbuck coffee. So no financial salesperson is interested. But the commission for ILP is HUGE while commission for endowment is enough to buy about 100 plates of chicken rice.
If you want to become financially independent, you and only you will decide how this is going to be done. Always remember that what you WANT is totally irrelevant. What you need is what you must have.
This blog was first written for CPF Board's IM$avvy website: https://www.areyouready.sg/YourInfoHub/Pages/Views-whatfreshyounggraduatesandyoungpersonsshouldnotdo.aspx
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